Chapter 9: Monopoly

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Chapter 9 Monopoly

• And then there was one

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First things firstthe real world

• Monopoly is back at McDonalds
• You all need to bring in your game pieces, at
  least the ones you arent using
• Collectively we will plug them in to the online
  version
• Playatmcd.com

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Overview

• Monopolycompared to PC
• Imperfect competition
• Barriers to entry
• MR MC
• MUST KNOW GRAPH (THE graph with different price
  curves)

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Review perfect competition

• Lots of sellers so no one single person has any
  market power (change price)
• Stuck dealing with market price
• Can sell as much as you want at that price
• Identical products smart consumers

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Not so perfect

• Imperfect competition occurs when sellers DO have
  market power
• 3 types--monopoly, oligopoly, monopolistic
  competition
• We focus almost exclusively on the extremes
• PC monopoly

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Stipulation

• Just because you can influence the price doesnt
  automatically mean you can do what you want with
  it
• CONSUMER SOVEREIGNTY still dictates that as
  consumers we will govern the economy based on
  what we buy
• Imperfect competitors can however alter that
  price above the normal profit level

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Trade-offs affect/effect us all

• They have the ability to raise the price, but
  doing so costs them consumers
• Law of demand says we buy less at higher prices,
  so they have to choose between selling more cheap
  or selling few at a higher price

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More power Higher prices

• The more market power a company has the higher
  they can raise their prices
• A monopoly can theoretically set their price at
  whatever level they likeno one can challenge
  them
• However, we can decide not to buy it though

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So how do you get it?

• Obviously businesses want market power
• How can you get it?
• 2 big ways
• 1. Bigger is better
• 2. Barriers to entry

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Economies of Scale

• Situation that allows your costs to drop as you
  get bigger
• Think about Wal-Marttheir market power came from
  their enormous buying power
• Huge store with millions of products
• Dont need to make much on any item

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Barriers keep people out

• Typically result from legal restrictions, high
  start-up costs, or NATURAL MONOPOLIES
• Government might only allow so many to existor
  only certain can qualify
• PA still controls liquor stores

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Big planes cruise ships

• How many companies in the world make big planes?
• 2Boeing Airbus?
• How many ports in the world make cruise ships?
• 1I think its in Norway (only place with deep
  enough water right next to land to build the
  ships)

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Technology can limit

• Expensive costs or limited resources can be a
  barrier
• So can technology
• Late breaking fields are not feasible to join
  because need specialized equipment or knowledge

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Natural ones make sense

• Natural monopolies occur when costs are
  consistently lowered as more customers join
• Bigger you get the cheaper it is for everyone
• Mostly found with utilitiesonce phone lines are
  ran how much does it cost for one more customer?

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Breather
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How does the graph change?

• In perfect competition the demand curve is a
  horizontal line
• Producer can sell as much as they want to at the
  market price
• Consumers are guaranteed to buy it all because
  each one is very small by themself

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Imperfect means not flat

• Since an imperfect competitor can change the
  price, the price is a downward sloping line
• Going back to the idea of a market
• The market graph is always an X
• If you are the market, your demand curve is an X

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Going down

• As the demand curve slopes down, each additional
  unit you sell is at a lower price
• Simple example on the board
• Price falls to increase output, but also consider
  the effect on MARGINAL REVENUE

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The key is MR

• Marginal revenue is the additional revenue gained
  from selling one more of a product
• Its the change in total revenue
• Take a look at the example on the board
• What happens to MR as price drops?

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MR Demand Separate

• As it goes further down, the two curves get
  further and further apart
• The MR always lies inside the demand curve
  because it is only considering the extra from the
  last one
• However, changing the price on the last one also
  changes the price on all previous ones sold
  (cant just change as you go)

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Put it on THE graph

• Demand goes downMR goes down inside it
• Otherwise the graph is exactly the same
• With the monopoly graph I like to start with
  demand and MR

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Demand
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Demand
MR
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MC
ATC
AVC
Demand
MR
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One rule with a few thingies

• The biggest rule is MR MC
• In PC the price is always the same so the MR is a
  constant (at the price)
• P MC becomes MR MC
• Always go in straight lines
• Nothing ever follows curves (except DEADWEIGHT
  LOSS)

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Finding Price Quantity

• Always start at MR MC
• Go straight up to the demand curve (which is the
  same as price) hang a left for Price
• Just go straight down for Quantity

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MC
ATC
AVC
P
Demand
MR
Q
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MC
ATC
AVC
DEADWEIGHT LOSS
Consumer Surplus
P
PROFIT
COSTS OF PRODUCTION
Demand
MR
Q
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IT ALL STARTS AT MR MC

• Everything always goes from there
• Need to know be able to the following
• PROFIT, COSTS OF PRODUCTION, CONSUMER SURPLUS,
  DEADWEIGHT LOSS

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WANT TO BE THERE

• If MR gt MC then you need to increase output
• If MR lt MC then you are making too much and need
  to decrease production
• Always want to be there

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Milk, cell phones, car keys

• My daughter has managed to lose, spill, or throw
  away them all
• I am on my 5th cell phone since mid summer
• MARGINAL PRINCIPLE says to only concern yourself
  with future decisions
• Whats in the past is in the pastdoesnt matter
  anymore

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Summary

• Just as important as PC
• Everything in here is mandatory for next class
• important info drizzles off from here